Clippers And Leonard Mess Is A Pandora’s Box For Pro Sports

LOS ANGELES, CALIFORNIA – JULY 24: (L-R) President of Basketball Operations Lawrence Frank, head coach Doc Rivers, Paul George, Kawhi Leonard and owner Steve Ballmer of the Los Angeles Clippers attend the Paul George and Kawhi Leonard introductory press conference at Green Meadows Recreation Center on July 24, 2019 in Los Angeles, California. (Photo by Kevork Djansezian/Getty Images)

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Pablo Torre reported Los Angeles Clippers owner Steve Ballmer facilitated $28 million in ghost endorsements to two-time National Basketball Association Finals MVP Kawhi Leonard, a seismic story for the NBA and professional sports at-large.

Listening to his work, and having built and investigated financial compliance in sport for years, my immediate reaction was that this is opening pandora’s box.

I encourage people to watch the video, but for those preferring to the written word, a breakdown of what exactly happened, why it matters and where gaps in the investigation still exist follows. Leonard, the Clippers and the NBA have not responded, and should be afforded the opportunity to do their own investigation.

How The NBA Compensation Restrictions Work

Player salaries in the NBA are not a free market; there is a Collective Bargaining Agreement with the National Basketball Player’s Association that governs compensation, colloquially called the salary cap. In essence, the money that players make for playing basketball is tabulated – by team – and restricted by a series of complex rules. Think of it like a spreadsheet, with players in one column, and dollars in another.

Money from external sources, such as endorsements and investments, are not included. And therein lies an incentive for cunning owners: using external entities, not necessarily subject to the same league and auditor scrutiny, to facilitate untracked payments.

This risk has only grown as soaring team valuations have attracted independently wealthy owners with companies and networks that extend far beyond the reach of the NBA or NBPA’s internal audit apparatuses.

So while the NBA for years has been concerned with tampering – one team courting a player under contract with another – wiser brains have been more focused on the risk of salary cap circumvention.

Why Kawhi Leonard Is At The Center

It starts with Aspiration Partners, a carbon-offsetting company in the crosshairs of the government. It’s co-founder, Joe Sanberg, recently pled guilty to charges by the Department of Justice of a $248 million scheme, and Aspiration itself filed for Chapter 11 bankruptcy.

Bankruptcy filings obtained by Torre list KL2 Aspire LLC, with Kawhi Leonard as its Manager/Member, as being owed $7 million. That amount, according to records Torre obtained, was part of a $28 million, November, 2021, endorsement deal with Aspiration.

Looking at the purported contract, the lack of commercial substance immediately jumps out; even Leonard’s deliverables, such as signing 50 pieces of memorabilia, or liking or reposting social content, appear to be completely at his discretion. And if Leonard leaves the Clippers, the agreement would be subject to termination.

Why Would Aspiration Allegedly Agree To Pay Leonard $28 million?

The Clippers and Aspiration had an existing business relationship, signing a 23-year, $300 million agreement in September 2021. According to Torre, around that same time, Ballmer invested $50 million in Aspiration.

Put together, the concern is that is that Aspiration was used to funnel Leonard money for basketball that would not be tracked in that pesky Clippers salary spreadsheet.

Kawhi Leonard Allegations Aren’t Entirely New

When Leonard first chose to play for the Clippers in 2019, it was reported that Leonard’s camp requested minimum endorsement guarantees.

Now, the agreement Torre showed was signed in 2022, while Leonard first chose the Clippers in 2019. In its investigation, expect the league to consider whether this Aspiration was the first of its kind, or whether similar contracts with other entities existed in 2020 and 2021.

Ironically, most cap circumvention penalties, such as draft picks, suspensions and fines, are team-only. One penalty that may affect Leonard- voiding his 2024-signed Clippers contract – could actually be a boon. Maximum salaries have risen and Leonard seems healthy.

Outcome Not Necessarily A Slam Dunk

Determining fair market value of endorsements is challenging. There isn’t an active market, like there is for shares in public companies, and issues have arisen in other sports. The English Premier League’s dispute with Manchester City, and the College Sports Commission’s range-of-compensation for NIL deals comes to mind.

Ballmer and Clippers could say that Aspiration entered into the agreement independently. They might also point to the lack of evidence tying the flow of endorsement funds from Ballmer and/or the Clippers to Leonard. Yes, Ballmer seems to have invested in Aspiration, and yes, Aspiration seems to have payments and/or payables to Leonard.

But nothing concrete indicates Ballmer or the Clippers funded the Aspiration payments to Leonard or directed that they may be made. The only real link is the whistleblower, and recall that Aspiration’s co-founder was charged with defrauding investors like Ballmer.

The NBA may consider they were related parties, a defined term in the CBA because of concerns around hidden basketball related income. But that definition essentially rests on common control; did that exist here?

And while Torre references the September 2021 $50m investment, tying that money directly to payments Leonard could open bigger concerns around taxes, accounting, company valuation and more.

Other NBA Teams Will Be Furious

Start with the Raptors, who had Bird rights, as Leonard’s old team, to pay Leonard more than the Clippers, so external payments would have bridged that gap. But the anger will likely extend; the salary cap is in place to level the playing field, and I’d be shocked if commissioner Adam Silver didn’t have 29 angry emails – some with nothing but a YouTube link – in his inbox this morning.

In 2000, David Stern penalized the Minnesota Timberwolves for signing Joe Smith to a series of secret contracts. But this story won’t just affect the NBA. The NFL and NHL have salary caps also. Major League Baseball doesn’t, but it does have competitive balance taxes and revenue sharing calculations that can fall apart with external transactions.

And Then There Is The Impact On M&A

Any acquisition carries the risk of hidden government violations, or so-called successor liability. Sports deals carry the additional risk of violations with a league or association, such as, oh, I don’t know, a star player being signed with off-the-books sweeteners. Well-crafted representations and warranties won’t help recover the lost draft picks or voided contracts.

Either Way, The Cat Is Out Of The Bag

By nature, financial compliance regulations restrict the free market. And so, by nature, there will always be an incentive for wealthy, aggressive, and resourceful stakeholders to circumvent those regulations. As Major League Baseball reportedly braces for its own salary cap, these risks only grow.

But this Clippers-Kawhi story takes it from the theoretical to the actual, at least in North America, so hopefully it gives the leagues – and their internal audit departments – enough of a mandate to prevent and enforce circumvention, and, ultimately, keep the playing field level.